Corporate Groups Essay

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                Student number: 1161322

                                                 Corporate Law

                                                  Research Essay

                                        

    Student number: 1161322

1. Corporate groups are common place in Australia today. Why do they pose problems in corporate law and is there a need to reform the operation of limited liability within these
                                        corporate groups?

                                                                                Word Count: 1, 998

Introduction
Corporate groups are composed of ‘two or more corporations that are affiliated with one another’, maintaining a separate legal entity status. This fundamental principle of being a ‘separate legal entity’ was established in a milestone decision in Salomon v A Salomon & Co. Corporate groups are comprised of a collection of companies ‘related’ to one another, formed in the context of a holding company and its subsidiaries. Notwithstanding these close relations, group responsibility of corporate members is basically ignored in Australia. Limited liability enshrines the existence of a separate personality, compelling liability on members to the value of their investment only. Due to notable corporate collapses like that of Ansett, the suitability of this concept is regularly contested. Limited liability will be considered in the essay, with specific reference to cases of tort and insolvency. In addition, it will be argued that corporate group responsibility is inadequately provided for in legislation, and therefore reform is necessary to ensure that people dealing with those companies are not unfairly disadvantaged.

Torts
Limited liability has been utilised as a way of evading tort claims, for instance the restructuring of the James Hardie Group. When the tortfeasor is a subsidiary of a holding company, claims against this individual are separate from that of the holding company. Due to this function of the corporate veil, a victim cannot sue another wealthier company in the group, simply because the tortfeasor company has insufficient assets of its own to recompense the victim of the tortious conduct. This appears contradictory, as the victims are involuntary to the situation and cannot choose the tortfeasor company, unlike creditors who are accountable for which company they choose to deal with. In situations where assets are owned by a different member in the group, victims have no chance of being compensated, thus reform is desirable.

Insolvency
“A creditor of a company, whether it be a member of a ‘group’ of companies…must look to that company for payment.” Mason J’s powerful words, accentuate the problems employees and creditors face in the event of insolvent subsidiaries. If assets have been intermingled when one member is facing insolvency, no compensation is usually provided by other group members. The restructuring of businesses will avoid this, as seen in Briggs v James Hardie Co. An appropriate arrangement can be achieved through judgement proofing which provides that one member holds the main assets, whilst another group member takes care of the risky business. Manipulating the concept of limited liability is detrimental to unsecured creditors, as some group assets are unfairly protected as a result of this.

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Limited liability can be impaired where assets are moved between companies within the group before insolvency arises. This will simply overthrow claims made by employees or unsecured creditors. Assets of the company are used to pay off any debts owed, notwithstanding that other groups have usually derived a benefit. In this situation, creditors or employees generally have no alternative to payment. An inquisitive example is evident in Patrick Stevedores Operations No 2 v Maritime Union of Australia (1998), with the corporate veil possibly acting as a barrier to retaining entitlements.

Furthermore, although Salomon concentrates on the discrete entity of a company, situations ...

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